Question

Assume your restaurant is an all-you-can-eat buffet that is open daily from 3:00 PM to 9:00 PM. You have the following sign that greets consumers as they come through the front door:

            Welcome Everyone!

        We hope you enjoy your dining experience with us!

                Buffet Price:

                3:00 PM to 5:00 PM Early Bird $10 per person

                5:00 PM to 9:00 PM Dinner $14 per person

                        *Senior Citizens receive a 10 percent discount at any time!

                        *Families with children under 8 years of age only pay HALF-PRICE for their kiddos with the purchase of one buffet at the regular price after 5:00 PM!

            a) Educate your assistant about third-degree price discrimination using the above sign. Why do it?

b) Educate your assistant about peak-load pricing using the above sign. What is the point of such a pricing strategy?

c) Suppose your restaurant gets a liquor license so that beer and wine can be served after 9:00PM. (You shut down the kitchen and serve alcohol only in the bar area until 2:00 AM.) However, you have a doorman who collects a $3.00 cover charge for each person who comes in. Once seated, they must order a beverage or will be asked to leave in order to prevent loitering. What would you tell your assistant regarding what type of pricing with market power/price discrimination is being used after hours?

Answer 1

a) Third degree price discrimination arises when prices do not reflect the cost of production and a different price is charged for different consumer group. In this example, an early bird is charged a lower price, while a person who comes closer to dinner time is charged a higher price. Senior citizens are given a discount, whereas families with children also have to pay a lower price. The restaurant does this type of discrimination in order to increase the customer base and increase the market power. If a uniform price is charged than people will come between 5 to 9 as per the usual dinner time, with no audience before 5. Now because of price discrimination, people are inclined to come in before 5 as they get to pay a lower price, plus a larger group of family members, order more and spend more with children. This eventually increases customer base and profitability.

b) Peak load pricing is a strategy wherein a high price is charged when the demand is expected to be high. Thus the price per person is high during 5 to 9 as that is the peak load when the demand is high as consumers usually prefer to eat dinner during that time. The point is to earn as much as possible when there is huge demand and less supply, thus restaurant gets to earn more as the demand is assured. Even if the price is high, consumers still prefer to eat at that time as they have no other choice.

c) This is a type of first degree price discrimination wherein the restaurant acts as a monopoly and charges the maximum possible price which the costumer is willing to pay. The restaurant earns the profit which is equal to the sum of producer and consumer surplus. Thus the restaurant charges an entry fee plus acts as a monopoly wherein consumers need to buy alcohol, which further increases the scope to earn maximum profitability.